Given all the recent talk about sanctions following the downing of a Russian warplane by Turkey on November 24 – and Russia’s actual imposition of the sanctions^[1] – in the following piece we address an important development in international law recognizing limitations on the freedom of states to impose sanctions – also referred to here as “countermeasures” – where the sanctions harm the investments of these states’ foreign investors.

More specifically, recent decisions by ICSID arbitration tribunals have taken into account the profound change brought about by the proliferation of investment treaties in the past few decades and the concurrent creation of, if you will, a “private right of action” in non-state actors.^[2] According to this authority a state considering imposing sanctions must weigh, when it has an investment treaty with the targeted state, whether the contemplated sanctions would harm the investments of investors from the targeted state and rise to a breach of the treaty.

The primary treaty in play here is the Turkey-Russia Bilateral Investment Treaty (BIT). Whether Russia – or Turkey, if it too gets involved in the sanctions game – has already or will breach any of its obligation under the BIT to Turkish investors as a result of its sanctions deserves the serious attention of any foreign investor negatively impacted by them.

The Turkey-Russia Bilateral Investment Treaty

Relevant foreign investment protections found in the Turkey-Russia BIT that may come into play here include, among others, the promise by both Turkey and Russia:

• Of “fair and equitable treatment” (BIT, Art. II.2 and Art. III.1)
• Of “full protection and security” (BIT, Art. II.2)
• That “[n]either Contracting Party shall impede by discriminatory measures the management, operation, maintenance, use, acquisition, expansion or disposal of investments” (BIT, Art. II.2) and
• That the investments “shall not be expropriated” without “prompt, adequate and effective compensation” (BIT, Art.VI).

Whether any of the sanctions in question – imposed or contemplated – may give rise to a viable claim under the BIT is, of course, a mixed question of fact and law that can only be assessed after thorough investigation. That said, it is no stretch to imagine situations where sanctions might give rise to such claims.

Countermeasure as an acceptable response to wrongful conduct

The most likely defence to sanctions-related damage claims brought pursuant to the BIT would be that the acts complained of were acceptable “countermeasures” taken in light of an “international wrongful act,” e.g. the downing of the Russian warplane.

As a general rule, for such a defence to be successful it would have to be shown that the countermeasures were (i) “taken in response to a previous international wrongful act of another state and must be directed against that state” and (ii) the state taking the countermeasures must have “called upon the state committing the wrongful act to discontinue its wrongful conduct.”^[3] Other considerations are that the effects of any given countermeasure must be “commensurate with the injury suffered” and that its purpose must be “to induce the wrongdoing state to comply with its obligations under international law.”^[4]

In Archer Daniels Midland v. United Mexican States, a majority of the three-arbitrator tribunal relied upon this rule when it rejected a countermeasure defence raised by Mexico. There, Mexico had amended its tax code to impose a 20 percent excise tax on soft drinks and syrups and the same tax on services used to transfer and distribute these products. The claimants, US corporations that produced corn syrup in Mexico, alleged the amendment violated provisions of Chapter Eleven of the North American Trade Agreement (NAFTA), which includes substantive protections for investors similar to those found in the Russia-Turkey BIT listed above.^[5]

In defence, Mexico claimed the amendment to the tax code was a countermeasure whose purpose was to induce the U.S. to comply with certain NAFTA obligations. The panel disagreed, concluding the evidence showed that “protection of the Mexican sugar industry was the true motive and intent” underlying the amendment.^[6]

More important – given two subsequent ICSID decisions – is the Concurring Opinion of the third arbitrator, Arthur Rovine. Rovine took the position that the countermeasure defence was simply unavailable under the circumstances, concluding “countermeasures cannot … eliminate, supersede, or suspend the rights of NAFTA investors to legal redress should the countermeasures constitute a breach of Chapter Eleven”^[7]. Referring to NAFTA – but using language we believe equally applicable to other investment treaties, such as the Turkey-Russia BIT – he observed:

… an investor needs predictability and stability, encouragement from the host state, legal standards that include basic minimum protections of investments, a right of legal redress in case of breach of any of those protections by the host state, and an atmosphere in which an investor need not fear that his investment will be diminished or taken because his host state has a trade dispute with his home state.^[8]

Rovine’s view was adopted by tribunals in two subsequent ICSID arbitrations, both of which also concerned claims brought by US investors in Mexico pursuant to NAFTA’s Chapter Eleven triggered by the same amendment to the tax code. Thus, in Corn Products International v. United Mexican States, it was held that:

… the doctrine of countermeasures, devised in the context of relations between States, is not applicable to claims under Chapter XI of the NAFTA. Those claims are brought by investors, not by States. A central purpose of Chapter XI of the NAFTA was to remove such claims from the inter-State plane and to ensure that investors could assert rights directly against a host State. The Tribunal considers that, in the context of such a claim, there is no room for a defence based upon the alleged wrongdoing not of the claimant but of its State of nationality, which is not a party to the proceedings.^[9]

Similarly, in Cargill v. United Mexican States the tribunal held that Mexico’s “argument that its actions were countermeasures cannot have the effect of precluding the wrongfulness of those actions in respect of a claim asserted under Chapter 11 by a national of the allegedly offending State.”^[10] In reaching this decision the panel observed that the “fact is that it is the investor that institutes the claim, that calls a tribunal into existence, and that is the named party in all respects to the resulting proceedings and award.”^[11]

In summary, authority now exists recognizing that a state – even when legitimately aggrieved by the wrongful conduct of another state – should not be free to fashion countermeasures that harm foreign investors from the targeted state, such as those protected by BITs. Whether countermeasures that have been and may be implemented in the aftermath of the downing of the Russia warplane by Turkey run afoul of this authority deserves careful consideration by foreign investors negatively impacted by them.

About Balcıoğlu Selçuk Ardıyok Keki

Balcıoğlu Selçuk Ardıyok Keki Attorney Partnership is an Istanbul-based full service law firm with a team of 130+ lawyers and economists. Our practice focuses on a wide range of areas including real estate, corporate, mergers and acquisitions, banking, project finance, capital markets, competition and anti-trust, employment, litigation and arbitration, telecommunication, regulatory and public law and intellectual property. We represent and advise Turkish and multinational clients, including Fortune 500 companies, in the banking and finance, private equity, real estate, manufacturing, hospitality and leisure, retail, automotive, energy, information technology, life sciences, luxury fashion and beauty, and media sectors.